This week on Hull on Estate and Succession Planning, Ian and Suzana discuss foreign real estate issues and tax planning.

Foreign Real Estate Issues - Hull on Estate and Succession Planning Podcast #90

Posted on December 11^th, 2007 by Hull & Hull LLP

Suzana Popovic-Montag:  Hi, and welcome to Hull on Estate and Succession Planning.  You’re listening to Episode #90 of our podcast on Tuesday, December 11^th, 2007.

Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by

Ian Hull and Suzana Popovic-Montag, that will provide information and insights into estate planning in Canada, from the offices of Hull Estate Mediation in Toronto, Ontario, Canada.  Here are Ian and Suzana.

Ian Hull:  Hi Suzana.

Suzana Popovic-Montag:  Hi there Ian, how are you?

Ian Hull:  I’m just great thanks.

Suzana Popovic-Montag:  That’s good.

Ian Hull:  As we venture into episode 90, very exciting.  We’re creeping towards 100, which will be a neat milestone as we’ve been podcasting for now about a year and a half.

Suzana Popovic-Montag:  Well, 90 weeks.

Ian Hull:  You did the math.

Suzana Popovic-Montag:  Unbelievable.  Just time does fly, it’s…by the time we’re at 100, that’s almost two years with the podcast, Ian.

Ian Hull:  That’s fantastic.  Well, its great and we’re really…I’m kind of looking forward to today’s podcast because we bump into this issue of foreign real estate so often when we’re dealing with estates, by either contentious or non-contentious.  And we’ve cleaned up, I think, the question of payment of taxes on death in our last podcast.  So let’s talk about foreign real estate and some of the issues that might surround that, just from a general estate planning and administration standpoint.

Suzana Popovic-Montag:  Well I think we see these situations arise more and more as clients come in through our doors because people do have estates that involve foreign elements to it.  And basically as a general rule, I think we can say that immovable property or property that’s like real estate that cannot be easily moved outside of a jurisdiction, will generally be subject to the domestic law of the jurisdiction that it’s actually located in.

Ian Hull:  So if we’re dealing with a Florida condominium, what we’re faced with typically is that’s an immovable property and so we’re going to be stuck with the rules of Florida in terms of dealing with it in some respects.

Suzana Popovic-Montag:  That’s right.  And I think also when we’re dealing with these situations, it helps if we can keep in mind the fact that some jurisdictions have what is called forced heirship taxes or consequences that may apply and we want to keep that in mind when we’re deciding whether or not there may be certain domestic taxes that may be payable as a consequence of death.

Ian Hull:  That’s so true because now, with an international portfolio, some people might have assets, for example, in Switzerland, which is a foreign jurisdiction that has forced heirship for example.  And, you know, we want to make sure that we’ve covered off that.  Sometimes we’ll even say to our clients, get a Will for that specific jurisdiction, given the unique characteristics of the law there.

Suzana Popovic-Montag:  It’s for sure.  And I think it’s an advisable thing to do that, to actually have counsel in the jurisdiction that the property is in, so that you make sure that there are nuances that we wouldn’t be familiar with as external counsel, that they’re actually picked up.  And I know some people even go so far as to have the Will in the foreign jurisdiction done in a foreign language, to make sure that there are no interpretation or other issues that may arise as a consequence.

Ian Hull:  So, just tying into the foreign real estate too, it’s a pretty good idea to name an executor who is a resident in the jurisdiction, to avoid probate problems that create it.

Suzana Popovic-Montag:  That’s for sure and also the bonding requirements, because often times when you’ve got an executor who is not in the jurisdiction where the deceased died, in order for that person to be appointed and to have authority do deal with the estate, there is a bonding requirement in many jurisdictions.  And if you’ve got an executor who is resident in the jurisdiction, you can avoid that hopefully.

Ian Hull:  So just let’s stay focused on the US real estate for a moment, because that’s where most typically we’re running into these scenarios.  Ownership by Canadians who are of US domicile, the real estate can be real problems.  And US estate tax is just something that you want to make sure that you have got a good handle on, especially we have cases where someone may not have lived in the US for many years, but they were US residents, that’s one important factor.  But when you’re a Canadian resident and you have US real estate, you want to be cognizant of the fact that there may be US estate tax payable.

Suzana Popovic-Montag:  Another thing that I think I certainly try to keep in mind, Ian, is the fact that when you hold US real estate through a Canadian resident corporation, I think in the past, there may have been some issue as to whether or not that might be one way to help avoid the US estate tax.  But that kind of arrangement now is no longer tax neutral, and so it’s something that we just want to sort of keep in mind going forward.

Ian Hull:  And non-spousal Canadian resident trusts, which we talked about the spousal trusts in many of our recent podcasts.  But the non-spousal one, where we have a Canadian inter vivos trust or a testamentary trust, they’re subject to, of course, the 21 year rule on the deemed realization of the capital property.  So we have to just watch that trigger point with US property as well.

Suzana Popovic-Montag:  Now Ian, just turning a little bit to some…just a very, I guess, cursory review of US estate tax consequences for US citizens who actually reside in Canada, one of the things that we certainly know is that there’s a $2,000,000 exemption that applies to US citizens.

Ian Hull:  That’s right.  And, you know, there’s this whole thing and we don’t want to get too heavy into this, but there is tax relief available for US and Canadian tax ownership issues.  And you talk about the exemption for sure for US citizens.  That I’m told is probably going to be increasing up over $3,000,000 over the years, probably by 2009, and so forth.  But that exemption and the protocols and so on, you really want to make sure you’ve sat down with a good tax advisor, an accountant or a lawyer, to give you some guidance on what to expect on property that can be certainly easily getting to the $2,000,000 range when you’re dealing with, you know, maybe a piece of real estate in the US and so forth.

Suzana Popovic-Montag:  Also there is what might come as a surprise to some people the fact that in the US, there is a gift tax that’s actually imposed on inter vivos gifts.  And that’s something that we also may want to seek some advice on from the professionals.

Ian Hull:  And again, just to give you an example of the gift tax, right now the annual gift tax exclusion exists to $12,000 to each and any number of people.  So what you’ll often see in an estate planning from the US standpoint, is that they will typically want to give their children, say you had a US resident father who lived down in the US who had significant assets, they often will send up gifts to their, say there’s some Canadian kids still living in Canada, they’ll often send up gifts of the $12,000 a year just to make sure that they stay under the taxable part of the gifting tax that’s in the US, but at the same time be able to pre-death provide some gifting for their children.  So it’s just a, you’ll see that kind of thing occur and it’s again something you may want to consider.

Suzana Popovic-Montag:  And you mentioned, Ian, something about the US/Canada protocol, what was that?

Ian Hull:  Well, over the years, the US and Canada have worked together to set up some sort of schemes and arrangements to make things more tax neutral.  And there’s a third protocol to Canada and the US tax treaty that’s been recently, relatively recently, organized between the two countries.  And it really just provides for relief of the transfers and allows for some estate planning to go cross-border without such draconian and significant tax hits, that may have occurred before the protocol.  For example, if you own US assets without the protocol, you can be hit with significant taxes, even if you live in Canada now.

Suzana Popovic-Montag:  And as part of that protocol there’s also the gift tax exemption of $115,000 annually that applies to gifts by US citizens to a non-US citizen spouse.

Ian Hull:   So these are the sorts of things that you may want to have available.  And again, you know, I mean this is detailed that is at a level that you wouldn’t typically want to get into.  Certainly we don’t want to get into it too heavily in this podcast because we need to emphasize how important the kind of technical issues that are involved with the protocol, with the tax issues, and who you should be seeing to get some guidance on.

Now…so just talking about the US estate tax again, if we look at the situation where there’s a US citizen who lives in Canada, there’s also another separate protocol that, you know, is available for that.  So, when we have someone who comes up from the US to work in Canada, there is availability in that regard too.

Suzana Popovic-Montag:  And that, I guess, you’re referring Ian to the marital credit for US citizens which will actually double the total exemption from the $2,000,000 we talked about earlier to $4,000,000 for any transfers on death to the non-citizen spouse or to a spousal trust.

Ian Hull:  And that will increase again.  I think by 2009, that may increase up to as high as $7,000,000.

Suzana Popovic-Montag:  Well that’s good.

Ian Hull:  So now if you have a non-US citizen who’s resident outside the US, they’re also subject to US estate tax on US assets.  So that’s something we want to make sure that…and, you know, this has come back to when we want to talk to our clients, we really do carefully talk about and sit down and figure who is where in the family tree.  And if there is a child who has, you know, you’re born and raised in Canada but your children may be all over the world but particularly in the US, where there’s a non-US citizen resident outside the US and that’s the classic scenario where someone might come up to run a company from headquarters down in the US from a large company, something like that.  There’s a whole tax regime that applies to them as well, once they’ve landed in Canada.

Suzana Popovic-Montag:  And when you talk about US assets, Ian, of course, I think you’re including both real estate, real property in the US, as well as stocks of US corporations as well.

Ian Hull:  That’s right.

So I think what we’ll do here today is, as I say, we wanted to maybe start to talk a little bit about some of these US interested issues that tie into estate planning.  And it just can’t hurt to get familiar with what this cross-border scenario is all about.  And even if we can begin to identify issues so that we can then be alerted to it, I think it may be worthwhile to spend some more time on our future podcasts about the US tax issues. 

So why don’t we wrap it up for today’s podcast on that point, and look forward to working through this issue some more.

Suzana Popovic-Montag:  Me too, and thanks very much.

You’ve been listening to Hull on Estate and Succession Planning with Ian Hull and Suzana Popovic-Montag.  The podcast you have been listening to has been provided as an information service.  It is a summary of current legal issues in estates and estate planning.  It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.

To listen to other Hull On podcasts, or to leave a question or comment, please visit our website at www.hullestatemediation.com.

Our theme music is UpTempo14 by Gary and is courtesy of the Podsafe Music Network.

/mem